In this article, I will be searching for quality dividend-growth stocks, which have underperformed the S&P 500 (NYSEARCA:SPY) during this large market correction. With the market going straight down since the beginning of the year, many quality companies have been unjustly thrown out with the rest of the market. This has a created an opportunity to potentially pick up quality companies for the long-term, at depressed prices.

Search Process

To build my initial list of stocks, I used the Fidelity stock screener to find high quality companies, that have underperformed the market over the last one & three months, however have outperformed the S&P 500 over the last year. In addition, I added criteria like recent EPS growth low short interest, low debt and included stock that have not been near a 52-week low during the last quarter.

Additionally, I used the Zacks stock screener to calculate the average projected long-term EPS growth for all companies with over a $5 billion market cap, as well as the average dividend-growth rate for those same stocks over the last five years. I found that the average projected long-term growth was 8.98%, and the average dividend-growth rate over the last five year was 16.36%.

Fidelity Screen Criteria

Market Cap: > $5 billion

Long-term EPS Growth Proj: > 8.98%

EPS Growth TTM vs Previous TTM: >.01%

Dividend: >.01

Price Performance 4-week: < -8.32% [SPY 4 wk return]

Price Performance 13-week: < -7.61% [SPY 13 wk return]

Price Performance 52-week: > -6.85% [SPY 52 wk return]

Short Interest: < 5%

Total Debt/Equity: <100%

Days since last 52 Week Low: >90

Initial Screened List

After entering the above criteria, I found that there were ten stocks, which met all these criteria and are listed in the table below.

I will be running each of the above ten stocks through two dividend-growth tests to determine the stocks that make my final list. My first test is to determine whether the above stocks have grown their dividends faster than the average dividend-growth rate of 16.36% I referenced in the search process section above. As the table below shows, six stocks had a dividend-growth rate that was above the average of 16.36%. Gilead and Marathon have not had five full years of paying dividends therefore that is why they have an NA.

I will be calculating whether the above six stocks that passed my first dividend-growth test can maintain or exceed their dividend-growth rate over the next five years. Below is an example of how my process works using one of my finalists SEIC. I ran each of the above six stocks in bold through this process and the results are listed in the table below.

SEIC

Calendar Year

Est. Div/Share

Shares

Divs $ Paid

Proj. Net Income

Proj. Div as % of Net Inc.

2016 est.

0.58

169.3

98.74

345.44

28.59%

2017 est.

0.68

169.3

115.19

374.06

30.79%

2018 est.

0.79

169.3

134.36

405.06

33.17%

2019 est.

0.93

169.3

156.73

438.63

35.73%

2020 est.

1.08

169.3

182.83

474.97

38.49%

Click to enlarge

Dividend-growth test #2 Results

As the data shows, out of the six stocks I tested, all of them with the exception of HollyFrontier, had very low-projected dividends as a percentage of net income.

Dividend Growth Rate

Net Income Growth Rate

Div as % of Net Inc 2016 Est.

Div as % of Net Inc. 2020 Est.

HOLLYFRONTIER

HFC

40.31%

28.21%

96.29%

138.12%

A. O. SMITH CORP

AOS

26.16%

37.61%

29.23%

18.76%

WALT DISNEY CO

DIS

22.93%

14.91%

29.62%

38.79%

MANPOWERGROUP

MAN

18.92%

19.31%

28.69%

28.32%

LEAR CORP

LEA

18.92%

11.29%

12.31%

16.04%

SEI INVESTMENTS CO

SEIC

16.65%

8.29%

28.59%

38.49%

Click to enlarge

Closing Thoughts

In closing, I believe A.O. Smith, Disney, Manpower Group, Lear and SEI Investments are all worthy of further research because each company has been unjustly sold off more than the market during this deep correction. In addition, each company has significant dividend growth potential because each company has a low payout ratio, which shows that they have a lot of room to continue raising dividends as at above average pace.

Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.